Strategic Purchasing Plan: Canned Fruit Product Category in Australia and New Zealand | Tanujaya | iBuss Management 5870 11058 1 SM
iBuss Management Vol. 5, No. 1, (2017) 19-28
Strategic Purchasing Plan: Canned Fruit Product Category
in Australia and New Zealand
Tania Aveline Tanujaya
International Business Management Program, Petra Christian University
Jl. Siwalankerto 121-131, Surabaya
E-mail: [email protected]
ABSTRACT
To strive as being the leader in the food and beverages industry, multinational companies have
been continuously improving its efficiency to optimize its operations and to maximize its
profitability. This research focusses on the role of a global procurement co-pack department, which
deals with the buying of finished goods from external contract manufacturers. Currently, the
sourcing process of Company X’s canned fruit products in Australia and New Zealand is being done
ad-hoc. This brings an opportunity to do a research on what is the best sourcing strategy for this
product category in order to bring cost savings and operational benefits for the company. This
research is conducted in a qualitative method, mainly using the primary and secondary sources from
company’s internal archival data, interviews with the global procurement co-pack team,
complemented with desk research from the internet. From the research, it shows that company X
should leverage competition among suppliers by using the tendering approach. By implementing
this strategy, Company X is expected to gain financial benefit for around 10% of the total spending.
As for the operational benefits, the company is expected to have less operational issues from
suppliers, economies of scale benefits, and less knowledge spillover.
Keywords: Purchasing, Procurement Strategy, Contract Manufacturers, Tendering
ABSTRAK
Untuk tetap menjadi pemimpin di industri makanan dan minuman, perusahaan-perusahaan
multinasional sedang terus berusaha meningkatkan efisiensi dengan mengoptimalkan operasi dan
memaksimalkan profitabilitasnya. Penelitian ini berfokus pada peran departemen pembelian copack, yang berhubungan dengan pembeliaan barang jadi dari produsen kontrak eksternal. Saat ini,
proses penyediaan produk buah kaleng Perusahaan X di Australia dan Selandia Baru dilakukan
secara “ad-hoc” Hal ini membawa peluang untuk melakukan penelitian terhadap strategi
persediaan untuk kategori produk buah kaleng dengan tujuan untuk melakukan penghematan biaya
dan membawa manfaat operasional bagi perusahaan. Penelitian ini dilakukan secara kualitatif,
terutama dengan menggunakan sumber primer dan sekunder dari data internal perusahaan,
wawancara dengan tim pembelian co-pack global, serta dilengkapi dengan penelitian deskriptif
dari internet. Hasil penelitian menunjukkan bahwa perusahaan X harus memanfaatkan persaingan
di antara pemasok dengan menggunakan metode “tendering”. Dengan menerapkan strategi ini,
perusahaan X diharapkan dapat memperoleh keuntungan finansial sekitar 10% dari total
pengeluaran di produk kategori ini dan juga memperoleh manfaat operasional bagi perusahaan.
Kata Kunci: Pembelian, Strategi Persediaan, Produsen Kontrak, Tendering
production and logistic cost, as well as to optimize the
distribution of the products within all regions. In addition to
that, not all of the products are produced in-house within the
company. Some of them are produced by contract
manufacturers all over the world in order to maximize the
efficiency of the production.
This research focusses on the role of a global
procurement co-pack department, which is dealing with the
INTRODUCTION
To strive as being the leader in the food and beverages
industry, multinational companies have been continuously
improving the efficiency of its operations to maximize its
profitability. With the global footprint of more than 200
brands that are owned by Company X, sourcing of supplies
and production activities are very crucial to minimize the
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buying of finished goods from external contract
manufacturers. It plays an important role to drive cost savings
and efficiency by finding the most suitable and profitable
contract manufacturers that can meet the products’
requirements and capacity from the company. This includes
creating and implementing the best strategy in relation with
where the products are being sold, the cost and profitability
margin, and also the quality and service of the contract
manufacturers.
Problem Description
As for the co-pack procurement department, it will
contribute to the company’s cost saving goals by reducing
the total spend for the contract manufacturers. As the
activities in each department of Company X is driven by its
management-by-objectives (MBO), the global procurement
co-pack team is expected to bring a certain number of savings
for the company at the end of year 2017 due to the company’s
objectives for this year. This savings target is set by the top
managers of the company at the beginning of each calendar
year as a goal to find any possible way to reduce cost within
the company. It is then divided to each department and
position to have an appropriate contribution in achieving the
target.
However, currently, the co-pack department has not
achieve 25% of the expected savings target in the first quarter
of 2017. It is caused by some product categories that are not
performing well, in terms of the operational and financial
benefit/savings that is expected to bring for the company.
One of the product categories that contributes to this gap is
the canned fruit products in Australia and New Zealand,
which caused by ineffective strategy that is currently
implemented by the company. Thus, a research on what is
the best sourcing strategy for this product category will be
very beneficial for Company X to minimize the gap and to
bring both financial and operational benefits for the company
in the future.
Figure 1. Procurement Strategy Framework
Adapted from Denali Group, 2013
Based on this framework, firstly understanding the
current procurement operations and identify what is
important for the procurement department, as well as the
overall company are the first two steps to create an effective
procurement strategy. It will be done by analyzing the current
procurement condition as the inputs, which involves the
business unit analysis of the company, current and alternative
supplier analysis, canned fruit industry analysis, and macro
analysis of Australia and New Zealand. From these data, the
author analyzed some strategic options that were screened
based on the suitability, feasibility, and acceptability for the
company to choose the proposed strategy. Lastly, the author
analyzed the expected results of the proposed strategy in term
of the financial benefits and operational benefits to define
what success looks like and develop measurable targets that
define the success.
Theoretical Practices of Global Procurement Strategy
Making decision to outsource production from the
internal factory to the external contract manufacturers is the
first thing to do before choosing the appropriate strategy. It
should be based on a proper make versus buy analysis, which
shows that shifting to the external manufacturers will create
potential savings for the company. There are some common
cases which can lead to this decision. The first one is when
there is a new product development that the company still
does not have the technology to produce internally. Another
example is when the company’s production capacity is lower
than the demand, thus creating a shortage of supply. In this
case, the company needs to outsource some of the production
to fulfill market demand and to avoid opportunity loss. On
the other hand, when the company’s production plant does
not run at its full capacity, it can also lead to the decision of
closing the internal factory and produce externally to avoid
inefficiency and high fixed operating cost.
In relation to that, there are 4 basic practices of
purchasing strategy by ATKearney that can be implemented
in sourcing the contract manufacturers. These 4 strategies
will be chosen based on the supplier’s power and the buyer’s
power, which will be broken down into 16 levers and 64
methods (ATKearney, n.d.).
LITERATURE REVIEW
Procurement strategy is defined as a plan for
optimizing external spend, procurement operations, and
other value contributions in a manner that supports the
overall corporate’s goals (Evans & Dearborn, 2013). With a
comprehensive procurement strategy in place, it will help to
align the procurement activities with the corporate strategy.
In doing this research to propose suitable procurement
strategy for Company X, the author used the adapted version
of procurement strategy framework by Denali Group, which
is an experienced consultation firm for sourcing services. It is
adapted based on the elements that are relevant and feasible
for this research in relation to the company’s data availability,
as shown in Figure 1.
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RESEARCH METHOD
The research is conducted mainly in the mono method,
which is qualitative research method. Qualitative
methodology is used as it is suitable for research that is
exploratory in nature, hence is able to explain the process
(Cooper & Schindler, 2012). In doing qualitative research,
the author combined the archival data from the company,
information from the interviews with some related parties,
and data collected from the internet to draw a conclusion and
create a set of recommendations based on in-depth analysis.
For this strategic purchasing plan, a prescriptive
research design is used. This is because the research and
analysis in this report aims to provide Company X with a set
of recommendations on what is the best strategy in sourcing
its canned fruit product category in Australia and New
Zealand from contract manufacturers. This will be beneficial
to increase the operational efficiency and to reach the cost
savings target for the company, especially the co-pack
department.
In doing this research, the author used primary data
from the global procurement co-pack department that are
available in the company. It includes the details of current
suppliers that the company uses, specifically for the canned
fruit products in Australia and New Zealand, the costs
involved, and other data related that will be useful for this
research. This data is used to understand the current
procurement operations for the canned fruit products in the
co-pack department.
To complement the data from the department,
interviews were also conducted. These interviews are useful
to get a more accurate picture of the current market condition
in Australia and New Zealand from the person who has
experiences in dealing and negotiating prices with the
suppliers. Interviews were also conducted with the global
category lead of co-pack department to know the best
practice and feasibility in implementing the proposed
strategy. The interviews were conducted in semi-structured
approach, in which the researcher will develop some key
questions that will be further elaborated in more detail by the
interviewees. These key questions are based on the topic list
that has been discussed with the co-pack procurement team
in order to create an appropriate procurement strategy. The
list of interviewees is made in regard to the people who are
dealing with the purchasing of products from external
manufacturers, especially for the canned fruit products in
Australia and New Zealand.
Besides primary research, the author also used desk
research for this project. This research is used to find initial
theory and strategic framework that will be used as the basis
of the research. In addition, desk research is also used to
obtain various data about the company, the market analysis
of canned fruit products, the supply of related contract
manufacturers, and the country analysis of Australia and
New Zealand. The data was mostly found through the
internet and was analyzed further to support the proposed
strategy for Company X.
Figure 2. ATKearney's 4 Purchasing Strategies
Source: ATKearney (n.d.)
The basic four purchasing strategies are shown in
Figure 2, which explains the appropriate strategy to be
implemented in accordance with that level of supplier’s
power and buyer’s power.
The first one is change the nature of demand, which is
for the case of high supplier power with low buyer power.
High supplier power exist when a supplier has a unique
technical advantage of exclusive market access, thus can be
succeed in establishing a monopolistic position. This position
often happens, and it is indirectly caused by the demand of
the buying company itself. Thus, to get over this situation,
changing the nature of demand strategy should be implanted.
It is by determining to what extend the company can modify
technical specifications of the product to regain freedom of
choice of sourcing the product (ATKearney, n.d.).
The second one is seek joint advantage with supplier,
which should be implemented when there is both high
supplier power and high buyer power. This strategy aims to
search jointly with the suppliers for both advantages. The
variants of this strategy range based on the scope and
intensity of the partnership, from coordinating demand and
capacity planning to increase the value chain effectiveness to
project-based sharing of costs and financial success/risk
(ATKearney, n.d.).
The third one is manage spend, which is for the case of
both low supplier power and buyer power. In this case,
knowing the details of what the company are buying from
which supplier is needed so that the possibility of offsetting
low demand power can be considered, either within the
company or across company boundaries (ATKearney, n.d.).
The last one is leverage competition among suppliers,
which should be implemented when the company has a high
buying power with low supplier power. In this case, the
company can seek for advantages by fueling competition
among suppliers through appropriate measure on the supplier
market and the use of analytical tools to influence supplier’s
pricing (ATKearney, n.d.).
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After analyzing the business unit data analysis, the
research is done further for the industry analysis of canned
fruit products in Australia and New Zealand. The evolution
of canning fruit products is believed to open up a whole new
opportunity for overall growth in food and beverages
industry. With this canning technique, it is not only enhance
the life of the fruits and other ingredients, but also make it
possible for consumer to enjoy fruits beyond their seasonal
time. Aside from that, canning technique is also considered
as an important part to preserve food for shipping and selling
it in a distant locations across the globe for all year round.
According to Sudip (2016), the global canned fruit market
was valued at US$8.62 billion in 2012, and expected to reach
US$10.83 billion by 2019 with a CAGR of 3.3% from 2013
to 2019. It is mainly caused by the increasing demand of
convenience food items, the rising yield of fruits, and the fact
that this product are based on environment-friendly raw
materials. However, there are some challenges that will be
faced in this industry, such as tough regulatory frameworks
and increasing competition from substitute items.
Now, the major market for canned fruit products
segmented geographically are in Europe, with the share of
40% in 2012, followed by North America with the share of
30% (Sudip, 2016). However, according to research analysts,
Asia Pacific is expected to surpass the leading markets in
term of the growth rate because of the rising in disposable
incomes, the shifting of food preferences, and the changing
of demographics in this region.
Specifically for the canned fruit products in Australia
and New Zealand, the Michael Porter’s Five Forces model is
used to analyze the market attractiveness and to understand
the competitive forces before strategically create an effective
positioning for the company. The first force is bargaining
power of suppliers, which assesses the power of suppliers to
drive up prices by looking at several aspects. As for the
number of suppliers within the canned fruit industry globally,
there are more than 300 companies from all over the world
who have the capability to produce canned fruit products
(Europages, 2017). 70 of them are located in China, while the
rest are spread in around 65 countries. This shows that the
goods and services provided by the suppliers are not that
unique, since there are many suppliers that are able to
produce the desired products for the company, in this case the
canned fruit products. This also means that the ability for
Company X to substitute suppliers is pretty high, since there
are many other suppliers who can fulfill demands from the
company. However, in terms of the cost of changing, it will
also be quite high for Company X because of the time and
effort needed to make sure that those suppliers meet all the
requirements from Company X to produce its products.
Changing to new suppliers will also takes quite a long of time
to build relationship, visit the factory, and make sure that
those suppliers’ financial condition are secure. In conclusion,
the suppliers’ power for Company X can be considered quite
low to moderate, which also depends on the size of each
supplier.
The second one is bargaining power of buyer, which
assesses the power of customers, in this case Company X, to
drive price down. Based on the interview with the buyer of
RESULTS AND DISCUSSION
Firstly to understand the current procurement condition
of the canned fruit product in Australia and New Zealand,
business unit data analysis should be conducted. This
includes the vision, mission, and objectives of the company,
the product portfolio of canned fruit products, as well as the
spending and savings projection of the products per supplier.
From this analysis, it is concluded that there are some
opportunities that should be captured in the canned fruit
product category.
Firstly, this product category is currently sourcing from
6 different suppliers, which some of them are having
insignificant number of spending and having the same
capabilities of production with each other. This means that
there is an opportunity to leverage the volume of the same
products that the company needs to less suppliers so that
Company X will have a better negotiation power because of
the economies of scale. Secondly, the negative number of
PPV from 4 of the suppliers shows that Company X is
currently sourcing the products with a negative pricing from
the suppliers compared to the calculated standard price. This
is another opportunity for Company X to find alternative
suppliers that will give a better pricing, and thus will
contribute positively to the savings target of the company.
Thirdly, from the cost card analysis of some of the suppliers,
it is found out that the suppliers that Company X are using
buy their raw materials, like sugar and citric acid, from their
own suppliers. This will be an opportunity for Company X
to get a better pricing from the suppliers by supplying these
raw materials from the company’s own suppliers and
combining the volume of these raw materials with the inhouse production.
Furthermore, based on the interview with the buyer of
canned fruit products in Australia and is the one directly in
contact with those suppliers, currently there are no strategy
implemented for this product category. The sourcing
activities are done ad-hoc, which means that they are just
doing short-term contract when the products are needed. In
addition to that, there is no project going on currently in the
canned fruit product category, which strengthen the needs to
apply these opportunities in the near future.
As for the supplier analysis, currently there are 6
contract manufacturers located in several countries that are
used to supply the canned fruit products to Australia and New
Zealand. These 6 suppliers are located in Indonesia,
Thailand, China, South Africa, and New Zealand. After
analyzing all the products that are produced by each supplier,
it can be seen that there are some suppliers that have the same
capabilities in producing similar products. For example, all
the products that are produced by Supplier A can also be
produced by Supplier B, and for the pineapple products, there
are currently two suppliers who actually have the capabilities
to produce similar products. In addition to that, the packaging
capabilities of each suppliers also strengthen the possibilities
to do this consolidation since there are some suppliers who
are having a wide range of capabilities in the packaging type.
Thus, this shows that there is an opportunity to consolidate
the sourcing of fruit canned products from less suppliers.
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3 months, but then it rains a lot starting from February.
Because of this, the fruit crops have been not very good in
Australia and New Zealand, and thus the company needs to
source the raw materials from other regions. In sourcing this
fruit products, timing is very important as the price will
fluctuate based on the harvest time of the fruits. During the
harvest time of the specific fruits, the supplies will be higher
and thus the company will get a better pricing. In contrary,
during the non-harvest time of the fruits, the supplies will be
low and thus the company will get a bad pricing from the
supplier.
Based on the interview, currently there is no specific
strategy implemented regarding the raw materials. The
sourcing process is done ad-hoc, which means that the buyer
regularly finds out what is the type of fruits in the upcoming
harvest time, and thus trying to negotiate for a good pricing
for those particular type of fruits.
Lastly, macro analysis is done to analyze the
organization’s external macro environment. Three related
elements in the PESTLE analysis framework will be used,
which are political, economic, and legal factors. This analysis
is important to identify the key factors from the wider and
uncontrollable external environment that will affect the
organization.
Political factor refers to the stability of the political
environment and attitudes of political parties in a specific
country. This includes the government involvement and
influence toward import tax policies or trade agreements.
This factor is inevitably entwine with the legal factor, such as
product safety regulations, international trade regulations and
trade restrictions. The difference between these two is that
political refers to the attitudes and approaches, while legal
refers to those which have become law and regulations
(Oxford Learning Lab, 2015).
The first element is free trade agreement, which is
international treaties that are made within two countries or a
group of countries to reduce barriers for trade and
investment. Currently, Australia has ten free trade
agreements with other countries in force and in the process
of doing negotiation with another seven countries (Australian
Government, 2017). These FTAs open up a better access of
market opportunities, improved Australia’s exports
competitive position, reduce import costs for businesses and
consumers, and create more prospects for two-way
investments.
With the global trends towards bilateral trade
agreements, such as Brexit, Trump’s protectionism plans
towards America’s economic growth, including the decision
to withdraw from several trade agreements with some
countries, and the force to get everyone ratify the TransPacific Partnership (TPP), Australia is geared up to take early
gains from these trends (Srivastava, 2017). In fact, Australia
has been in the fast track of bilateral trade agreements with
China and US, and is one of the only six countries (the other
five are South Korea, Singapore, Chile, Peru, and Costa
Rica) that have in place the free trade agreement with those
two countries. Thus, if Australia quickly wraps up FTA with
the European Union, United Kingdom, and Canada, this
country will be the only major link among these global major
canned fruit product in Australia and New Zealand,
Company X has a pretty high bargaining power with some
of the suppliers. It is because of the high volume that
Company X supply from that supplier. Thus, Company X is
included as one of its biggest customers and thus have a quite
high bargaining power. Aside from the volume factor,
Company X bargaining power with suppliers is also depends
on the timing of negotiation and closing the deal (Beroe,
2017). During the harvest time of the particular type of fruits,
the supplies of the product will surely be higher, which leads
to a higher bargaining power to drive the price down. Added
with the relatively high ability to substitute suppliers,
Company X bargaining power is concluded to be quite high
in the canned fruit product industry.
The third one is threat of new entrants, which assesses
the ability of other player to enter the market, in this case, the
manufacturers of canned fruit products. As the process to
produce canned fruit products requires a high level of
automation with developed processing facilities and
machinery, thus the capital investment for a new company to
enter this industry is pretty high. In relation to that, economies
of scale plays a significant role to drive down fixed cost of
the company. Furthermore, this industry also has a high
dependency of the weather conditions which affect the raw
material price. Thus, new entrants will also face challenges
in securing raw materials supply at an early stage, which lead
to high cost fluctuation risk. Establishing a good relation with
farmers should be done before entering this industry to make
sure that the company can get supplies of raw materials to be
processed. In conclusion, the threat of new entry in the
canned fruit industry is pretty low since the barriers for new
entrants is quite high.
The fourth one is threat of substitution, which assess
the ability of customers to substitute your products with the
others that serve similar functions. In the canned fruit
industry, the threat of substitution is considered low. It is
because fruit varieties can be substituted with each other
based on the cost and preferences of individuals (Beroe,
2017). However, since Company X also has a variety types
of fruit in its canned fruit product category, thus those
products can be substituted with each other.
The last one is competitive rivalry, which assess the
degree of competition in the marketplace based on the
number of existing competitors and the capability of each
competitor in the industry. Currently, the competition in the
canned fruit industry is pretty high among few big players in
the developed market (Sudip, 2016). However, the
increasing presence of small-scale players in the developing
countries has decreased the intensity of rivalry. Furthermore,
the practices to do contract farming have minimized the price
fluctuation because of the high dependability of price with
the raw materials cost.
Besides looking at the market attractiveness of the
canned fruit products, the raw material condition of the
products is also one of the significant factors that determine
the sourcing price from the suppliers. Based on the interview
with Company X buyer in Australia and New Zealand,
currently the season in Australia and New Zealand is quite
bad, because it was really hot with pretty little rain in the past
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is uncertainty about the food safety, and the proactive
compliance and enforcement activities to communicate this
changes to the importers. This amendment will be introduced
in the mid of 2017 and become effective during 2018
(Australian Governement, 2017). Thus, food importers will
have several months to adjust their business practices before
the amendment is being enforced.
The other factor is economic factor. This factor refers
to the wider economy condition of a country, which include
the economic growth rates, exchange rates, inflation rates,
and other monetary policies applied (Oxford Learning Lab,
2015). Currently, the economic growth in Australia and New
Zealand is decelerated, even though still in a healthy GDP
outturn. It is due to the weak labor market in Australia with a
weak wage growth, which in turn dragged down the retail
sales. In addition with the fragile financial situation of highly
indebted households, it is predicted that some market sectors
will be oversupplied, which will slow down investment.
However, taking the broader view, business confidence has
remained strong. It is caused by the rising credit growth of
the private sector, which will push non-mining business
investment over the coming year, and the upswing in
commodity prices, which has led to a positive trade balance
in the past few months (FocusEconomics, 2017).
With the current economic outlook of Australia, the
exchange rate of Australian dollars against US dollars was
significantly weakened during 2015-2016, but has started to
show improvement in 2017 (XE, 2017). While for the
inflation rate, consumer prices in Australia rose 2.1% in the
first quarter of 2017. It is an increase from the fourth quarter
in 2016 with 1.5% of inflation rate, and is the highest since
the last quarter in 2014 mainly driven by the surge of
transportation cost and an increase in the cost of housing,
food, and beverages (Trading Economics, 2017).
While in New Zealand, the economic cycle started to
show the signs of mature stage. In the first two months of
2017, business confidence has decreased, productivity
growth has lightened, and businesses are struggling to get
skilled labors. However, it is predicted that this slowdown
will not last long, as the country’s growth outlook is one of
the brightest in the next few years among the highest-graded
countries (FocusEconomics, 2017). New Zealand dollar is
also started to strengthen after the significant drop in the
beginning of 2016 (XE, 2017). Likewise, the inflation rate in
the first quarter of 2017 also exceeds the expectations of 2%,
with consumer prices increased by 2.2%. This is mainly
explained by the food group, which rose 1.6% and is the
highest since the third quarter in 2011 (Trading Economics,
2017).
After doing the Porter’s five forces analysis, it is shown
that Company X is currently having a quite high buyer’s
power with low to moderate supplier’s power particularly for
the canned fruit products category. Thus, the appropriate
strategy for Company X to implement based on the
ATKearney’s Purchasing Strategy Framework is to leverage
competition among suppliers. This strategy should be
implemented to get an appropriate measure on the pricing
that the company has from the current suppliers, as well as to
get a higher influence in negotiating the supplier’s pricing.
countries, which surely will give high growth opportunities
(Lieto, 2017).
Aside from Australia, New Zealand is also exploiting
opportunities through free trade agreements with many
countries all over the world. The key interests and benefits
from those agreements are the extensive tariff reduction, the
opportunities to tap into international supply chain with the
changes in rule of origin products, and economic cooperation
projects with other countries (New Zealand Foreign Affairs
and Trade, 2017).
New Zealand has FTAs in force with most Asian
countries, while some other FTAs that have been concluded
but not yet in force are with American countries, both the
North America countries and some South America countries.
Furthermore, New Zealand is also in the process of FTA
negotiation with some countries, like Russia, Kazakhstan,
and India, to streamline processes and create more certainty
for companies in doing business overseas.
The second element is tariff and import duties. In
Australia and New Zealand, these are calculated with the
FOB valuation method, which means that it is calculated
exclusively on the imported goods value. In addition to duty,
there are other taxes and charges for imported goods, such as
sales tax (GST), import entry transaction fee, and customs
service fee. The duty rates in Australia vary from 0% - 10%,
with an average of 4.6%, while in Australia it is vary from
0%-15% with an average of 5.11% (Pitney Bowes, 2017).
The declaration procedures are based on self-assessment by
importers, which should be based on the guideline provided
by the Department of Foreign Affairs and Trade. Thus,
importers have a legal obligation to assess their goods
correctly, with penalties for any incorrect or misleading
information (Pitney Bowes, 2017).
Based on the interview with the buyer of the company,
most of the canned fruit products, which is pineapple
products, are imported from Thailand and Indonesia. In this
particular product, Company X does not need to pay any
import duties for the products imported from Indonesia,
while import duties are applied for the products from
Thailand. There are also some other countries where import
duties are not applied in Australia, such as Philippines, but
Company X does not import any canned fruit products from
those countries.
The last element is import foods regulations. In
Australia and New Zealand, all imported foods must comply
with the Australia and New Zealand Food Standards Code,
which is a law that requires all food, both produced
domestically and imported, to meet the food safety standards.
For food entering Australia, it is subject to the Imported Food
Control Act 1992, which requires inspection and control
using the Imported Food Inspection Scheme (IFIS). This
food safety system is currently being strengthen to better
protect consumer health in Australia and New Zealand. The
objectives are to increase importers’ accountability for food
safety, including the sourcing of safe food, and to improve
the monitoring of new emerging food safety risks. There are
some changes, both legislatively and non-legislatively,
related to the documentary of the importer’s assured supply
chain, the power to hold imported food at the border if there
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this approach, Company X can find any opportunity to save
costs by leveraging raw materials or packaging materials
from the suppliers with our in-house production. For
example, looking at the cost card of one of the suppliers, it is
shown that this supplier source sugar and citric acid from its
own suppliers, which are different with our ingredient
suppliers for the in-house production. These materials make
up some percentage of the total cost that the company paid to
the suppliers, thus it must be analyzed further with Company
X’s ingredients department if the company wants to actually
source those materials with lower cost. However, this
approach is also not really acceptable to be implemented now
because of the time constraint of some fruit contracts that
need to be closed soon. Thus, this strategy approach should
be implemented for the next step.
After analyzing the 4 approaches for the “leverage
competition among suppliers” strategy and based on the
interview with the Global Procurement Co-Pack department,
tendering approach is chosen as the best approach that should
be implemented by Company X for the canned fruit product
category. In doing tendering, the RFI and RFP process
method will be used, and it will be divided into two phases
based on the harvest time of the fruits.
Phase 1: This phase focusses on the fruit products with
the harvest time within 1-4 months, thus focusses on all fruits
that have the highest supplies within June to September. In
the Northern hemisphere countries, these months are the
peak season for almost all types of fruits that Company X
needed, except pineapple and apricots. While in the southern
countries, such as Indonesia and New Zealand, the peak time
for almost all fruit products have passed, thus it will be more
expensive for Company X to source from these countries
during this period. Based on the harvest time of the fruits,
pineapple and apricots products should be excluded in this
tender phase.
With the relatively short time to prepare the tender, it is
best to just invite the current suppliers for this phase. It is
because those suppliers have been thoroughly checked and
audited by Company X, thus does not need a long process to
send the RFP. The steps to do this tender are as follow:
1. Send out the renewed NDA to the suppliers and ask them
to return them as soon as possible with their signature.
2. Prepare the RFP template that will be sent to the
suppliers, specifying the SKU number, the description of
the products, the volume estimation in 2017, and some
blank columns to be filled by the suppliers regarding the
pricing breakdown.
3. Send the final RFP with the specs of products to the
suppliers after they return the signed NDA.
4. Get the quoted pricing from the suppliers.
5. Analyze the result and negotiate based on the pricing
from all suppliers.
In analyzing the result of the tender, Company X
should not only look at the final price that the suppliers
quoted. The price break down for raw materials and
packaging materials should also be taken into consideration
since those are the opportunities to negotiate for lower prices
For this strategy, there are 4 options of approach based
on the ATKearney framework. The first approach is to do
tendering. This approach is an effective way to get
transparency of prices in the supplier market. There are some
steps in the tendering process, the first one is to identify
potential suppliers that will be invited for the tender. This step
is followed by the preparation of needed documents for the
tender, such as NDA, RFP, and product’s specification,
which then will be mailed to the identified potential suppliers.
After all suppliers sent back their quotation in the RFP,
Company X needs to analyze the result of the bids and do
negotiations with the selected suppliers.
By doing this approach, Company X can minimize the
number of suppliers by selecting few suppliers who give the
best price for the company. Furthermore, Company X can
also consolidate the volume of similar products and source
them from only one supplier instead of two or three suppliers.
Before doing this process, it is crucial to review the harvest
time of each type of fruits. Thus, tendering should be done
during the peak time of supplies in order to get the lowest
price possible to source those products from the suppliers.
The second one is supplier pricing review. This
approach involves comparing the prices of the company’s
current sourcing category with the prices paid by other
companies with similar conditions or specifications. One
way to do this is by comparing similar products that are
currently produced by several different suppliers. Aside from
that, Company X can also review and compare the pricing of
similar products from different brands that the company has.
By doing this comparison, Company X can review the prices
from current suppliers and find potential to negotiate for
better prices.
The third approach is globalization, which means to
find alternative suppliers from the global market. As the
current suppliers are mostly from Asian countries with low
conversion cost, Company X should try to look and find
other suppliers from not a wider global perspective. Based on
the alternative suppliers’ analysis, there are some top players
in the processed fruits industry, such as Doehler Group in
Europe, Northwest Natural Corporation in North America,
and Selial Industria Comercio in Latin America that have the
capabilities to produce many types of fruit in a can.
However, this approach is not really acceptable
because of a higher transportation cost to get the products to
Australia and New Zealand, and also the possibilities of a
higher duty rate because of the lack of free trade agreement
in force from those countries. In addition to that, sourcing
from new suppliers that have never been in a cooperation
with Company X will require a long process and time to
make check the company’s condition both operationally and
financially, to build relationship with those suppliers, and to
negotiate as well as to make agreement with them.
The last approach is target pricing, which is to ask the
suppliers for cost structure break down, in term of raw
materials cost, packaging material cost, and conversion cost.
From this information, Company X can analyze how is the
sourcing condition of each suppliers, in term of where they
source its raw materials and packaging materials, as well as
the pricing breakdown that is paid by Company X. By doing
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is when the company got the price quotation from the
suppliers in the tender and did the negotiation with the
suppliers. From the new agreed price with the suppliers, then
it will be compared with the standard price set by the
company at the beginning of the year. The differentiation
from these two numbers times with the total volume of each
product in 2017 will be the end result for the cost savings
benefits. Based on the interview with the global category lead
of co-pack department, the estimated cost savings for
Company X by doing this tender is around 10% of the total
spending in this product category.
Aside from the financial benefits, operational benefits
should also be taken into consideration as it will make the
purchasing process more effective and efficient. Firstly, the
benefit of leveraging the suppliers is to have less operational
issues within the purchasing process. It is mainly because the
buyer will deal and in contact with less suppliers, which will
end up in less time and effort needed to communicate and
build relationship with the suppliers. For example, when
buyers need to request for cost card from suppliers or manage
day-to-day activities during the ordering of supplies process,
they just need to contact and follow up from a few number of
suppliers, which can maximize the time needed to get those
things done. Secondly is the benefit from economies of scale.
By leveraging the volume of several products and source
them from the same suppliers, thus the total volume that is
ordered by Company X will be higher, which can drag down
the fixed cost price from the suppliers. Lastly, knowledge
spillover is also one of the benefits from implementing this
strategy. By having less number of suppliers to produce
Company X’s products, then the specifications and other
confidential details of these products will only be known by
less parties.
On the other hand, there are also some risks that will
arise in implementing this strategy for the canned fruit
product category. The first one is the increase of
dependability to just one or few suppliers in sourcing the
products. This will be a problem when there is any disruption
from those suppliers that will lead to a delay in procuring the
products. Aside from this, suppliers’ power will also increase
if they are aware that the company is very dependent to them
for this particular product category. Thus, Company X’s
power to negotiate with those suppliers in the future will be
decreased. To mitigate this risk, Company X needs to give
some buffer in time during the procurement process. This is
to avoid any long delay in getting the product when
disruption occurred from the suppliers. Furthermore,
Company X should also keep the fact from its suppliers that
the company is very dependent of them. This will be
supported by doing RFI/RFP method regularly every year to
keep the competition within suppliers.
The second risk is regarding the tendering process. In
doing this approach, suppliers are quoting the price based on
the information in the excel sheet and the specification only,
not the real products. This will create a problem if there is any
inaccurate data in the information sheet, such as in terms of
the volume, how the products should be delivered, the quality
requirement, etc. This kind of errors will affect the quoted or
agreed price with the suppliers, with the risk of getting a
to the supplier. For example when supplier A quoted the
lowest final price, however the raw materials price are quite
significantly higher than supplier B, then Company X can
negotiate to supplier A by saying that the other suppliers can
provide a lower price for the raw materials.
Phase 2: This phase focusses on the fruit products with
the harvest time in more than 4 months or the products that
are not included in phase 1, which are apricots and pineapple.
In addition to that, most of the fruits in the southern
hemisphere countries are also having their peak harvest time
in the beginning of the year. For this phase, Company X
should include alternative suppliers for the RFI/RFP process
since there is enough time for Company X to contact the new
suppliers, check the companies if they meet the requirements
and quality needed to produce the products, visiting the
factory in the respective country, and auditing the financial
aspect of the companies. After doing this, the company can
start with the RFI/RFP process.
This strategy approach is the best to be implemented by
Company X because it is evaluated as suitable, feasible, and
acceptable. Firstly, the suitability is evaluated based on the
business unit data of the company. One of the most important
aspect is that the overall rational of the strategy fits with the
organization’s mission and objective, which is to build world
class sourcing capabilities and to deliver positive PPV in
2017. In addition to that, based on the product portfolio and
its spending, consolidation of suppliers is needed as the
current number of suppliers is not really efficient. It is shown
by some similar products that are currently produced by more
than one supplier, and some suppliers with relatively low
spending that only produce three to four products for the
company.
Secondly, in terms of the feasibility, it is evaluated by
the constraints to source the products from other countries to
Australia and New Zealand. As analyzed in the macro
analysis of Australia and New Zealand, it is feasible to source
products from both the current suppliers and the alternative
suppliers as Australia and New Zealand has a wide range of
FTA’s with many countries. Currently, there is also no
restriction to import products from a specific country,
however it has to strictly comply with the import food
regulation in Australia and New Zealand. Aside from that,
the duty rates should also be considered as they are different
for each country.
Lastly, the acceptability is evaluated based on the
current contract’s bound and time constraint to implement
the strategy. Based on the interview with Kent, the current
procurement process is still ad-hoc with no contract bound.
Thus, it is acceptable to directly change suppliers during this
time. In addition to that, the time needed to apply this strategy
is also acceptable, as it can still be concluded during the
harvest time of the fruits, which is the time when prices are
at the lowest point.
By implementing this strategy, it is expected to bring
both financial benefits and operational benefits for the
company. The financial benefit that is expected from this
strategy is in term of cost savings to source the canned fruit
products from external manufacturers. These benefits can
only be calculated once the RFI/RFP process is done, which
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around 10% of the total spending in the canned fruit product
category in Australia and New Zealand. In term of the
operational benefits, consolidating suppliers will leads to less
effort and time for the buyers to source this products. In
addition to that, Company X will also get the benefits from
economies of scale and also less knowledge spillover from
the implementation of this strategy.
There are some limitations and constraints for this
research report, which are as follows:
The 12-week time constraint and some confidential reports
have limited the possibility of exhaustive research
regarding the external analysis, especially the market
analysis and supply analysis.
The availability and confidentiality of some financial data
from the company, such as the profit margin of each
product and the actual number of cost savings that has been
achieved in 2017.
The cost limitation has limited the possibility to conduct
field research of contract manufacturers in Australia and
New Zealand.
For further research regarding strategic purchasing
plan from external manufacturers, the author recommends to
apply the theoretical framework and the purchasing
chessboard into various other case study to better refine the
model. Furthermore, the reliability of the application of these
framework should also be tested across several other
categories and in different area of procurement process.
Further research should also be done regarding other criteria
to select procurement strategy aside from the industry
analysis of the products and also the effectiveness of those
criteria towards the implementation of the strategy.
For the company itself, the author recommends that the
analysis to select and implement sourcing strategy should be
conducted continuously since the market and industry
condition will surely change overtime. Thus, the strategy that
is recommended in this report may not be the most applicable
in the next few years, and further research on how to best
source this product category from external manufacturers
should be reevaluated again.
higher price afterwards. To mitigate this risk, Company X
needs to review all the important information and
specifications before sending the RFP to the suppliers to
make sure that this information is accurate.
The third risk is regarding the cooperation with new
supplier. Since quality is a very crucial aspect in fo
Strategic Purchasing Plan: Canned Fruit Product Category
in Australia and New Zealand
Tania Aveline Tanujaya
International Business Management Program, Petra Christian University
Jl. Siwalankerto 121-131, Surabaya
E-mail: [email protected]
ABSTRACT
To strive as being the leader in the food and beverages industry, multinational companies have
been continuously improving its efficiency to optimize its operations and to maximize its
profitability. This research focusses on the role of a global procurement co-pack department, which
deals with the buying of finished goods from external contract manufacturers. Currently, the
sourcing process of Company X’s canned fruit products in Australia and New Zealand is being done
ad-hoc. This brings an opportunity to do a research on what is the best sourcing strategy for this
product category in order to bring cost savings and operational benefits for the company. This
research is conducted in a qualitative method, mainly using the primary and secondary sources from
company’s internal archival data, interviews with the global procurement co-pack team,
complemented with desk research from the internet. From the research, it shows that company X
should leverage competition among suppliers by using the tendering approach. By implementing
this strategy, Company X is expected to gain financial benefit for around 10% of the total spending.
As for the operational benefits, the company is expected to have less operational issues from
suppliers, economies of scale benefits, and less knowledge spillover.
Keywords: Purchasing, Procurement Strategy, Contract Manufacturers, Tendering
ABSTRAK
Untuk tetap menjadi pemimpin di industri makanan dan minuman, perusahaan-perusahaan
multinasional sedang terus berusaha meningkatkan efisiensi dengan mengoptimalkan operasi dan
memaksimalkan profitabilitasnya. Penelitian ini berfokus pada peran departemen pembelian copack, yang berhubungan dengan pembeliaan barang jadi dari produsen kontrak eksternal. Saat ini,
proses penyediaan produk buah kaleng Perusahaan X di Australia dan Selandia Baru dilakukan
secara “ad-hoc” Hal ini membawa peluang untuk melakukan penelitian terhadap strategi
persediaan untuk kategori produk buah kaleng dengan tujuan untuk melakukan penghematan biaya
dan membawa manfaat operasional bagi perusahaan. Penelitian ini dilakukan secara kualitatif,
terutama dengan menggunakan sumber primer dan sekunder dari data internal perusahaan,
wawancara dengan tim pembelian co-pack global, serta dilengkapi dengan penelitian deskriptif
dari internet. Hasil penelitian menunjukkan bahwa perusahaan X harus memanfaatkan persaingan
di antara pemasok dengan menggunakan metode “tendering”. Dengan menerapkan strategi ini,
perusahaan X diharapkan dapat memperoleh keuntungan finansial sekitar 10% dari total
pengeluaran di produk kategori ini dan juga memperoleh manfaat operasional bagi perusahaan.
Kata Kunci: Pembelian, Strategi Persediaan, Produsen Kontrak, Tendering
production and logistic cost, as well as to optimize the
distribution of the products within all regions. In addition to
that, not all of the products are produced in-house within the
company. Some of them are produced by contract
manufacturers all over the world in order to maximize the
efficiency of the production.
This research focusses on the role of a global
procurement co-pack department, which is dealing with the
INTRODUCTION
To strive as being the leader in the food and beverages
industry, multinational companies have been continuously
improving the efficiency of its operations to maximize its
profitability. With the global footprint of more than 200
brands that are owned by Company X, sourcing of supplies
and production activities are very crucial to minimize the
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buying of finished goods from external contract
manufacturers. It plays an important role to drive cost savings
and efficiency by finding the most suitable and profitable
contract manufacturers that can meet the products’
requirements and capacity from the company. This includes
creating and implementing the best strategy in relation with
where the products are being sold, the cost and profitability
margin, and also the quality and service of the contract
manufacturers.
Problem Description
As for the co-pack procurement department, it will
contribute to the company’s cost saving goals by reducing
the total spend for the contract manufacturers. As the
activities in each department of Company X is driven by its
management-by-objectives (MBO), the global procurement
co-pack team is expected to bring a certain number of savings
for the company at the end of year 2017 due to the company’s
objectives for this year. This savings target is set by the top
managers of the company at the beginning of each calendar
year as a goal to find any possible way to reduce cost within
the company. It is then divided to each department and
position to have an appropriate contribution in achieving the
target.
However, currently, the co-pack department has not
achieve 25% of the expected savings target in the first quarter
of 2017. It is caused by some product categories that are not
performing well, in terms of the operational and financial
benefit/savings that is expected to bring for the company.
One of the product categories that contributes to this gap is
the canned fruit products in Australia and New Zealand,
which caused by ineffective strategy that is currently
implemented by the company. Thus, a research on what is
the best sourcing strategy for this product category will be
very beneficial for Company X to minimize the gap and to
bring both financial and operational benefits for the company
in the future.
Figure 1. Procurement Strategy Framework
Adapted from Denali Group, 2013
Based on this framework, firstly understanding the
current procurement operations and identify what is
important for the procurement department, as well as the
overall company are the first two steps to create an effective
procurement strategy. It will be done by analyzing the current
procurement condition as the inputs, which involves the
business unit analysis of the company, current and alternative
supplier analysis, canned fruit industry analysis, and macro
analysis of Australia and New Zealand. From these data, the
author analyzed some strategic options that were screened
based on the suitability, feasibility, and acceptability for the
company to choose the proposed strategy. Lastly, the author
analyzed the expected results of the proposed strategy in term
of the financial benefits and operational benefits to define
what success looks like and develop measurable targets that
define the success.
Theoretical Practices of Global Procurement Strategy
Making decision to outsource production from the
internal factory to the external contract manufacturers is the
first thing to do before choosing the appropriate strategy. It
should be based on a proper make versus buy analysis, which
shows that shifting to the external manufacturers will create
potential savings for the company. There are some common
cases which can lead to this decision. The first one is when
there is a new product development that the company still
does not have the technology to produce internally. Another
example is when the company’s production capacity is lower
than the demand, thus creating a shortage of supply. In this
case, the company needs to outsource some of the production
to fulfill market demand and to avoid opportunity loss. On
the other hand, when the company’s production plant does
not run at its full capacity, it can also lead to the decision of
closing the internal factory and produce externally to avoid
inefficiency and high fixed operating cost.
In relation to that, there are 4 basic practices of
purchasing strategy by ATKearney that can be implemented
in sourcing the contract manufacturers. These 4 strategies
will be chosen based on the supplier’s power and the buyer’s
power, which will be broken down into 16 levers and 64
methods (ATKearney, n.d.).
LITERATURE REVIEW
Procurement strategy is defined as a plan for
optimizing external spend, procurement operations, and
other value contributions in a manner that supports the
overall corporate’s goals (Evans & Dearborn, 2013). With a
comprehensive procurement strategy in place, it will help to
align the procurement activities with the corporate strategy.
In doing this research to propose suitable procurement
strategy for Company X, the author used the adapted version
of procurement strategy framework by Denali Group, which
is an experienced consultation firm for sourcing services. It is
adapted based on the elements that are relevant and feasible
for this research in relation to the company’s data availability,
as shown in Figure 1.
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RESEARCH METHOD
The research is conducted mainly in the mono method,
which is qualitative research method. Qualitative
methodology is used as it is suitable for research that is
exploratory in nature, hence is able to explain the process
(Cooper & Schindler, 2012). In doing qualitative research,
the author combined the archival data from the company,
information from the interviews with some related parties,
and data collected from the internet to draw a conclusion and
create a set of recommendations based on in-depth analysis.
For this strategic purchasing plan, a prescriptive
research design is used. This is because the research and
analysis in this report aims to provide Company X with a set
of recommendations on what is the best strategy in sourcing
its canned fruit product category in Australia and New
Zealand from contract manufacturers. This will be beneficial
to increase the operational efficiency and to reach the cost
savings target for the company, especially the co-pack
department.
In doing this research, the author used primary data
from the global procurement co-pack department that are
available in the company. It includes the details of current
suppliers that the company uses, specifically for the canned
fruit products in Australia and New Zealand, the costs
involved, and other data related that will be useful for this
research. This data is used to understand the current
procurement operations for the canned fruit products in the
co-pack department.
To complement the data from the department,
interviews were also conducted. These interviews are useful
to get a more accurate picture of the current market condition
in Australia and New Zealand from the person who has
experiences in dealing and negotiating prices with the
suppliers. Interviews were also conducted with the global
category lead of co-pack department to know the best
practice and feasibility in implementing the proposed
strategy. The interviews were conducted in semi-structured
approach, in which the researcher will develop some key
questions that will be further elaborated in more detail by the
interviewees. These key questions are based on the topic list
that has been discussed with the co-pack procurement team
in order to create an appropriate procurement strategy. The
list of interviewees is made in regard to the people who are
dealing with the purchasing of products from external
manufacturers, especially for the canned fruit products in
Australia and New Zealand.
Besides primary research, the author also used desk
research for this project. This research is used to find initial
theory and strategic framework that will be used as the basis
of the research. In addition, desk research is also used to
obtain various data about the company, the market analysis
of canned fruit products, the supply of related contract
manufacturers, and the country analysis of Australia and
New Zealand. The data was mostly found through the
internet and was analyzed further to support the proposed
strategy for Company X.
Figure 2. ATKearney's 4 Purchasing Strategies
Source: ATKearney (n.d.)
The basic four purchasing strategies are shown in
Figure 2, which explains the appropriate strategy to be
implemented in accordance with that level of supplier’s
power and buyer’s power.
The first one is change the nature of demand, which is
for the case of high supplier power with low buyer power.
High supplier power exist when a supplier has a unique
technical advantage of exclusive market access, thus can be
succeed in establishing a monopolistic position. This position
often happens, and it is indirectly caused by the demand of
the buying company itself. Thus, to get over this situation,
changing the nature of demand strategy should be implanted.
It is by determining to what extend the company can modify
technical specifications of the product to regain freedom of
choice of sourcing the product (ATKearney, n.d.).
The second one is seek joint advantage with supplier,
which should be implemented when there is both high
supplier power and high buyer power. This strategy aims to
search jointly with the suppliers for both advantages. The
variants of this strategy range based on the scope and
intensity of the partnership, from coordinating demand and
capacity planning to increase the value chain effectiveness to
project-based sharing of costs and financial success/risk
(ATKearney, n.d.).
The third one is manage spend, which is for the case of
both low supplier power and buyer power. In this case,
knowing the details of what the company are buying from
which supplier is needed so that the possibility of offsetting
low demand power can be considered, either within the
company or across company boundaries (ATKearney, n.d.).
The last one is leverage competition among suppliers,
which should be implemented when the company has a high
buying power with low supplier power. In this case, the
company can seek for advantages by fueling competition
among suppliers through appropriate measure on the supplier
market and the use of analytical tools to influence supplier’s
pricing (ATKearney, n.d.).
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After analyzing the business unit data analysis, the
research is done further for the industry analysis of canned
fruit products in Australia and New Zealand. The evolution
of canning fruit products is believed to open up a whole new
opportunity for overall growth in food and beverages
industry. With this canning technique, it is not only enhance
the life of the fruits and other ingredients, but also make it
possible for consumer to enjoy fruits beyond their seasonal
time. Aside from that, canning technique is also considered
as an important part to preserve food for shipping and selling
it in a distant locations across the globe for all year round.
According to Sudip (2016), the global canned fruit market
was valued at US$8.62 billion in 2012, and expected to reach
US$10.83 billion by 2019 with a CAGR of 3.3% from 2013
to 2019. It is mainly caused by the increasing demand of
convenience food items, the rising yield of fruits, and the fact
that this product are based on environment-friendly raw
materials. However, there are some challenges that will be
faced in this industry, such as tough regulatory frameworks
and increasing competition from substitute items.
Now, the major market for canned fruit products
segmented geographically are in Europe, with the share of
40% in 2012, followed by North America with the share of
30% (Sudip, 2016). However, according to research analysts,
Asia Pacific is expected to surpass the leading markets in
term of the growth rate because of the rising in disposable
incomes, the shifting of food preferences, and the changing
of demographics in this region.
Specifically for the canned fruit products in Australia
and New Zealand, the Michael Porter’s Five Forces model is
used to analyze the market attractiveness and to understand
the competitive forces before strategically create an effective
positioning for the company. The first force is bargaining
power of suppliers, which assesses the power of suppliers to
drive up prices by looking at several aspects. As for the
number of suppliers within the canned fruit industry globally,
there are more than 300 companies from all over the world
who have the capability to produce canned fruit products
(Europages, 2017). 70 of them are located in China, while the
rest are spread in around 65 countries. This shows that the
goods and services provided by the suppliers are not that
unique, since there are many suppliers that are able to
produce the desired products for the company, in this case the
canned fruit products. This also means that the ability for
Company X to substitute suppliers is pretty high, since there
are many other suppliers who can fulfill demands from the
company. However, in terms of the cost of changing, it will
also be quite high for Company X because of the time and
effort needed to make sure that those suppliers meet all the
requirements from Company X to produce its products.
Changing to new suppliers will also takes quite a long of time
to build relationship, visit the factory, and make sure that
those suppliers’ financial condition are secure. In conclusion,
the suppliers’ power for Company X can be considered quite
low to moderate, which also depends on the size of each
supplier.
The second one is bargaining power of buyer, which
assesses the power of customers, in this case Company X, to
drive price down. Based on the interview with the buyer of
RESULTS AND DISCUSSION
Firstly to understand the current procurement condition
of the canned fruit product in Australia and New Zealand,
business unit data analysis should be conducted. This
includes the vision, mission, and objectives of the company,
the product portfolio of canned fruit products, as well as the
spending and savings projection of the products per supplier.
From this analysis, it is concluded that there are some
opportunities that should be captured in the canned fruit
product category.
Firstly, this product category is currently sourcing from
6 different suppliers, which some of them are having
insignificant number of spending and having the same
capabilities of production with each other. This means that
there is an opportunity to leverage the volume of the same
products that the company needs to less suppliers so that
Company X will have a better negotiation power because of
the economies of scale. Secondly, the negative number of
PPV from 4 of the suppliers shows that Company X is
currently sourcing the products with a negative pricing from
the suppliers compared to the calculated standard price. This
is another opportunity for Company X to find alternative
suppliers that will give a better pricing, and thus will
contribute positively to the savings target of the company.
Thirdly, from the cost card analysis of some of the suppliers,
it is found out that the suppliers that Company X are using
buy their raw materials, like sugar and citric acid, from their
own suppliers. This will be an opportunity for Company X
to get a better pricing from the suppliers by supplying these
raw materials from the company’s own suppliers and
combining the volume of these raw materials with the inhouse production.
Furthermore, based on the interview with the buyer of
canned fruit products in Australia and is the one directly in
contact with those suppliers, currently there are no strategy
implemented for this product category. The sourcing
activities are done ad-hoc, which means that they are just
doing short-term contract when the products are needed. In
addition to that, there is no project going on currently in the
canned fruit product category, which strengthen the needs to
apply these opportunities in the near future.
As for the supplier analysis, currently there are 6
contract manufacturers located in several countries that are
used to supply the canned fruit products to Australia and New
Zealand. These 6 suppliers are located in Indonesia,
Thailand, China, South Africa, and New Zealand. After
analyzing all the products that are produced by each supplier,
it can be seen that there are some suppliers that have the same
capabilities in producing similar products. For example, all
the products that are produced by Supplier A can also be
produced by Supplier B, and for the pineapple products, there
are currently two suppliers who actually have the capabilities
to produce similar products. In addition to that, the packaging
capabilities of each suppliers also strengthen the possibilities
to do this consolidation since there are some suppliers who
are having a wide range of capabilities in the packaging type.
Thus, this shows that there is an opportunity to consolidate
the sourcing of fruit canned products from less suppliers.
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3 months, but then it rains a lot starting from February.
Because of this, the fruit crops have been not very good in
Australia and New Zealand, and thus the company needs to
source the raw materials from other regions. In sourcing this
fruit products, timing is very important as the price will
fluctuate based on the harvest time of the fruits. During the
harvest time of the specific fruits, the supplies will be higher
and thus the company will get a better pricing. In contrary,
during the non-harvest time of the fruits, the supplies will be
low and thus the company will get a bad pricing from the
supplier.
Based on the interview, currently there is no specific
strategy implemented regarding the raw materials. The
sourcing process is done ad-hoc, which means that the buyer
regularly finds out what is the type of fruits in the upcoming
harvest time, and thus trying to negotiate for a good pricing
for those particular type of fruits.
Lastly, macro analysis is done to analyze the
organization’s external macro environment. Three related
elements in the PESTLE analysis framework will be used,
which are political, economic, and legal factors. This analysis
is important to identify the key factors from the wider and
uncontrollable external environment that will affect the
organization.
Political factor refers to the stability of the political
environment and attitudes of political parties in a specific
country. This includes the government involvement and
influence toward import tax policies or trade agreements.
This factor is inevitably entwine with the legal factor, such as
product safety regulations, international trade regulations and
trade restrictions. The difference between these two is that
political refers to the attitudes and approaches, while legal
refers to those which have become law and regulations
(Oxford Learning Lab, 2015).
The first element is free trade agreement, which is
international treaties that are made within two countries or a
group of countries to reduce barriers for trade and
investment. Currently, Australia has ten free trade
agreements with other countries in force and in the process
of doing negotiation with another seven countries (Australian
Government, 2017). These FTAs open up a better access of
market opportunities, improved Australia’s exports
competitive position, reduce import costs for businesses and
consumers, and create more prospects for two-way
investments.
With the global trends towards bilateral trade
agreements, such as Brexit, Trump’s protectionism plans
towards America’s economic growth, including the decision
to withdraw from several trade agreements with some
countries, and the force to get everyone ratify the TransPacific Partnership (TPP), Australia is geared up to take early
gains from these trends (Srivastava, 2017). In fact, Australia
has been in the fast track of bilateral trade agreements with
China and US, and is one of the only six countries (the other
five are South Korea, Singapore, Chile, Peru, and Costa
Rica) that have in place the free trade agreement with those
two countries. Thus, if Australia quickly wraps up FTA with
the European Union, United Kingdom, and Canada, this
country will be the only major link among these global major
canned fruit product in Australia and New Zealand,
Company X has a pretty high bargaining power with some
of the suppliers. It is because of the high volume that
Company X supply from that supplier. Thus, Company X is
included as one of its biggest customers and thus have a quite
high bargaining power. Aside from the volume factor,
Company X bargaining power with suppliers is also depends
on the timing of negotiation and closing the deal (Beroe,
2017). During the harvest time of the particular type of fruits,
the supplies of the product will surely be higher, which leads
to a higher bargaining power to drive the price down. Added
with the relatively high ability to substitute suppliers,
Company X bargaining power is concluded to be quite high
in the canned fruit product industry.
The third one is threat of new entrants, which assesses
the ability of other player to enter the market, in this case, the
manufacturers of canned fruit products. As the process to
produce canned fruit products requires a high level of
automation with developed processing facilities and
machinery, thus the capital investment for a new company to
enter this industry is pretty high. In relation to that, economies
of scale plays a significant role to drive down fixed cost of
the company. Furthermore, this industry also has a high
dependency of the weather conditions which affect the raw
material price. Thus, new entrants will also face challenges
in securing raw materials supply at an early stage, which lead
to high cost fluctuation risk. Establishing a good relation with
farmers should be done before entering this industry to make
sure that the company can get supplies of raw materials to be
processed. In conclusion, the threat of new entry in the
canned fruit industry is pretty low since the barriers for new
entrants is quite high.
The fourth one is threat of substitution, which assess
the ability of customers to substitute your products with the
others that serve similar functions. In the canned fruit
industry, the threat of substitution is considered low. It is
because fruit varieties can be substituted with each other
based on the cost and preferences of individuals (Beroe,
2017). However, since Company X also has a variety types
of fruit in its canned fruit product category, thus those
products can be substituted with each other.
The last one is competitive rivalry, which assess the
degree of competition in the marketplace based on the
number of existing competitors and the capability of each
competitor in the industry. Currently, the competition in the
canned fruit industry is pretty high among few big players in
the developed market (Sudip, 2016). However, the
increasing presence of small-scale players in the developing
countries has decreased the intensity of rivalry. Furthermore,
the practices to do contract farming have minimized the price
fluctuation because of the high dependability of price with
the raw materials cost.
Besides looking at the market attractiveness of the
canned fruit products, the raw material condition of the
products is also one of the significant factors that determine
the sourcing price from the suppliers. Based on the interview
with Company X buyer in Australia and New Zealand,
currently the season in Australia and New Zealand is quite
bad, because it was really hot with pretty little rain in the past
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is uncertainty about the food safety, and the proactive
compliance and enforcement activities to communicate this
changes to the importers. This amendment will be introduced
in the mid of 2017 and become effective during 2018
(Australian Governement, 2017). Thus, food importers will
have several months to adjust their business practices before
the amendment is being enforced.
The other factor is economic factor. This factor refers
to the wider economy condition of a country, which include
the economic growth rates, exchange rates, inflation rates,
and other monetary policies applied (Oxford Learning Lab,
2015). Currently, the economic growth in Australia and New
Zealand is decelerated, even though still in a healthy GDP
outturn. It is due to the weak labor market in Australia with a
weak wage growth, which in turn dragged down the retail
sales. In addition with the fragile financial situation of highly
indebted households, it is predicted that some market sectors
will be oversupplied, which will slow down investment.
However, taking the broader view, business confidence has
remained strong. It is caused by the rising credit growth of
the private sector, which will push non-mining business
investment over the coming year, and the upswing in
commodity prices, which has led to a positive trade balance
in the past few months (FocusEconomics, 2017).
With the current economic outlook of Australia, the
exchange rate of Australian dollars against US dollars was
significantly weakened during 2015-2016, but has started to
show improvement in 2017 (XE, 2017). While for the
inflation rate, consumer prices in Australia rose 2.1% in the
first quarter of 2017. It is an increase from the fourth quarter
in 2016 with 1.5% of inflation rate, and is the highest since
the last quarter in 2014 mainly driven by the surge of
transportation cost and an increase in the cost of housing,
food, and beverages (Trading Economics, 2017).
While in New Zealand, the economic cycle started to
show the signs of mature stage. In the first two months of
2017, business confidence has decreased, productivity
growth has lightened, and businesses are struggling to get
skilled labors. However, it is predicted that this slowdown
will not last long, as the country’s growth outlook is one of
the brightest in the next few years among the highest-graded
countries (FocusEconomics, 2017). New Zealand dollar is
also started to strengthen after the significant drop in the
beginning of 2016 (XE, 2017). Likewise, the inflation rate in
the first quarter of 2017 also exceeds the expectations of 2%,
with consumer prices increased by 2.2%. This is mainly
explained by the food group, which rose 1.6% and is the
highest since the third quarter in 2011 (Trading Economics,
2017).
After doing the Porter’s five forces analysis, it is shown
that Company X is currently having a quite high buyer’s
power with low to moderate supplier’s power particularly for
the canned fruit products category. Thus, the appropriate
strategy for Company X to implement based on the
ATKearney’s Purchasing Strategy Framework is to leverage
competition among suppliers. This strategy should be
implemented to get an appropriate measure on the pricing
that the company has from the current suppliers, as well as to
get a higher influence in negotiating the supplier’s pricing.
countries, which surely will give high growth opportunities
(Lieto, 2017).
Aside from Australia, New Zealand is also exploiting
opportunities through free trade agreements with many
countries all over the world. The key interests and benefits
from those agreements are the extensive tariff reduction, the
opportunities to tap into international supply chain with the
changes in rule of origin products, and economic cooperation
projects with other countries (New Zealand Foreign Affairs
and Trade, 2017).
New Zealand has FTAs in force with most Asian
countries, while some other FTAs that have been concluded
but not yet in force are with American countries, both the
North America countries and some South America countries.
Furthermore, New Zealand is also in the process of FTA
negotiation with some countries, like Russia, Kazakhstan,
and India, to streamline processes and create more certainty
for companies in doing business overseas.
The second element is tariff and import duties. In
Australia and New Zealand, these are calculated with the
FOB valuation method, which means that it is calculated
exclusively on the imported goods value. In addition to duty,
there are other taxes and charges for imported goods, such as
sales tax (GST), import entry transaction fee, and customs
service fee. The duty rates in Australia vary from 0% - 10%,
with an average of 4.6%, while in Australia it is vary from
0%-15% with an average of 5.11% (Pitney Bowes, 2017).
The declaration procedures are based on self-assessment by
importers, which should be based on the guideline provided
by the Department of Foreign Affairs and Trade. Thus,
importers have a legal obligation to assess their goods
correctly, with penalties for any incorrect or misleading
information (Pitney Bowes, 2017).
Based on the interview with the buyer of the company,
most of the canned fruit products, which is pineapple
products, are imported from Thailand and Indonesia. In this
particular product, Company X does not need to pay any
import duties for the products imported from Indonesia,
while import duties are applied for the products from
Thailand. There are also some other countries where import
duties are not applied in Australia, such as Philippines, but
Company X does not import any canned fruit products from
those countries.
The last element is import foods regulations. In
Australia and New Zealand, all imported foods must comply
with the Australia and New Zealand Food Standards Code,
which is a law that requires all food, both produced
domestically and imported, to meet the food safety standards.
For food entering Australia, it is subject to the Imported Food
Control Act 1992, which requires inspection and control
using the Imported Food Inspection Scheme (IFIS). This
food safety system is currently being strengthen to better
protect consumer health in Australia and New Zealand. The
objectives are to increase importers’ accountability for food
safety, including the sourcing of safe food, and to improve
the monitoring of new emerging food safety risks. There are
some changes, both legislatively and non-legislatively,
related to the documentary of the importer’s assured supply
chain, the power to hold imported food at the border if there
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this approach, Company X can find any opportunity to save
costs by leveraging raw materials or packaging materials
from the suppliers with our in-house production. For
example, looking at the cost card of one of the suppliers, it is
shown that this supplier source sugar and citric acid from its
own suppliers, which are different with our ingredient
suppliers for the in-house production. These materials make
up some percentage of the total cost that the company paid to
the suppliers, thus it must be analyzed further with Company
X’s ingredients department if the company wants to actually
source those materials with lower cost. However, this
approach is also not really acceptable to be implemented now
because of the time constraint of some fruit contracts that
need to be closed soon. Thus, this strategy approach should
be implemented for the next step.
After analyzing the 4 approaches for the “leverage
competition among suppliers” strategy and based on the
interview with the Global Procurement Co-Pack department,
tendering approach is chosen as the best approach that should
be implemented by Company X for the canned fruit product
category. In doing tendering, the RFI and RFP process
method will be used, and it will be divided into two phases
based on the harvest time of the fruits.
Phase 1: This phase focusses on the fruit products with
the harvest time within 1-4 months, thus focusses on all fruits
that have the highest supplies within June to September. In
the Northern hemisphere countries, these months are the
peak season for almost all types of fruits that Company X
needed, except pineapple and apricots. While in the southern
countries, such as Indonesia and New Zealand, the peak time
for almost all fruit products have passed, thus it will be more
expensive for Company X to source from these countries
during this period. Based on the harvest time of the fruits,
pineapple and apricots products should be excluded in this
tender phase.
With the relatively short time to prepare the tender, it is
best to just invite the current suppliers for this phase. It is
because those suppliers have been thoroughly checked and
audited by Company X, thus does not need a long process to
send the RFP. The steps to do this tender are as follow:
1. Send out the renewed NDA to the suppliers and ask them
to return them as soon as possible with their signature.
2. Prepare the RFP template that will be sent to the
suppliers, specifying the SKU number, the description of
the products, the volume estimation in 2017, and some
blank columns to be filled by the suppliers regarding the
pricing breakdown.
3. Send the final RFP with the specs of products to the
suppliers after they return the signed NDA.
4. Get the quoted pricing from the suppliers.
5. Analyze the result and negotiate based on the pricing
from all suppliers.
In analyzing the result of the tender, Company X
should not only look at the final price that the suppliers
quoted. The price break down for raw materials and
packaging materials should also be taken into consideration
since those are the opportunities to negotiate for lower prices
For this strategy, there are 4 options of approach based
on the ATKearney framework. The first approach is to do
tendering. This approach is an effective way to get
transparency of prices in the supplier market. There are some
steps in the tendering process, the first one is to identify
potential suppliers that will be invited for the tender. This step
is followed by the preparation of needed documents for the
tender, such as NDA, RFP, and product’s specification,
which then will be mailed to the identified potential suppliers.
After all suppliers sent back their quotation in the RFP,
Company X needs to analyze the result of the bids and do
negotiations with the selected suppliers.
By doing this approach, Company X can minimize the
number of suppliers by selecting few suppliers who give the
best price for the company. Furthermore, Company X can
also consolidate the volume of similar products and source
them from only one supplier instead of two or three suppliers.
Before doing this process, it is crucial to review the harvest
time of each type of fruits. Thus, tendering should be done
during the peak time of supplies in order to get the lowest
price possible to source those products from the suppliers.
The second one is supplier pricing review. This
approach involves comparing the prices of the company’s
current sourcing category with the prices paid by other
companies with similar conditions or specifications. One
way to do this is by comparing similar products that are
currently produced by several different suppliers. Aside from
that, Company X can also review and compare the pricing of
similar products from different brands that the company has.
By doing this comparison, Company X can review the prices
from current suppliers and find potential to negotiate for
better prices.
The third approach is globalization, which means to
find alternative suppliers from the global market. As the
current suppliers are mostly from Asian countries with low
conversion cost, Company X should try to look and find
other suppliers from not a wider global perspective. Based on
the alternative suppliers’ analysis, there are some top players
in the processed fruits industry, such as Doehler Group in
Europe, Northwest Natural Corporation in North America,
and Selial Industria Comercio in Latin America that have the
capabilities to produce many types of fruit in a can.
However, this approach is not really acceptable
because of a higher transportation cost to get the products to
Australia and New Zealand, and also the possibilities of a
higher duty rate because of the lack of free trade agreement
in force from those countries. In addition to that, sourcing
from new suppliers that have never been in a cooperation
with Company X will require a long process and time to
make check the company’s condition both operationally and
financially, to build relationship with those suppliers, and to
negotiate as well as to make agreement with them.
The last approach is target pricing, which is to ask the
suppliers for cost structure break down, in term of raw
materials cost, packaging material cost, and conversion cost.
From this information, Company X can analyze how is the
sourcing condition of each suppliers, in term of where they
source its raw materials and packaging materials, as well as
the pricing breakdown that is paid by Company X. By doing
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is when the company got the price quotation from the
suppliers in the tender and did the negotiation with the
suppliers. From the new agreed price with the suppliers, then
it will be compared with the standard price set by the
company at the beginning of the year. The differentiation
from these two numbers times with the total volume of each
product in 2017 will be the end result for the cost savings
benefits. Based on the interview with the global category lead
of co-pack department, the estimated cost savings for
Company X by doing this tender is around 10% of the total
spending in this product category.
Aside from the financial benefits, operational benefits
should also be taken into consideration as it will make the
purchasing process more effective and efficient. Firstly, the
benefit of leveraging the suppliers is to have less operational
issues within the purchasing process. It is mainly because the
buyer will deal and in contact with less suppliers, which will
end up in less time and effort needed to communicate and
build relationship with the suppliers. For example, when
buyers need to request for cost card from suppliers or manage
day-to-day activities during the ordering of supplies process,
they just need to contact and follow up from a few number of
suppliers, which can maximize the time needed to get those
things done. Secondly is the benefit from economies of scale.
By leveraging the volume of several products and source
them from the same suppliers, thus the total volume that is
ordered by Company X will be higher, which can drag down
the fixed cost price from the suppliers. Lastly, knowledge
spillover is also one of the benefits from implementing this
strategy. By having less number of suppliers to produce
Company X’s products, then the specifications and other
confidential details of these products will only be known by
less parties.
On the other hand, there are also some risks that will
arise in implementing this strategy for the canned fruit
product category. The first one is the increase of
dependability to just one or few suppliers in sourcing the
products. This will be a problem when there is any disruption
from those suppliers that will lead to a delay in procuring the
products. Aside from this, suppliers’ power will also increase
if they are aware that the company is very dependent to them
for this particular product category. Thus, Company X’s
power to negotiate with those suppliers in the future will be
decreased. To mitigate this risk, Company X needs to give
some buffer in time during the procurement process. This is
to avoid any long delay in getting the product when
disruption occurred from the suppliers. Furthermore,
Company X should also keep the fact from its suppliers that
the company is very dependent of them. This will be
supported by doing RFI/RFP method regularly every year to
keep the competition within suppliers.
The second risk is regarding the tendering process. In
doing this approach, suppliers are quoting the price based on
the information in the excel sheet and the specification only,
not the real products. This will create a problem if there is any
inaccurate data in the information sheet, such as in terms of
the volume, how the products should be delivered, the quality
requirement, etc. This kind of errors will affect the quoted or
agreed price with the suppliers, with the risk of getting a
to the supplier. For example when supplier A quoted the
lowest final price, however the raw materials price are quite
significantly higher than supplier B, then Company X can
negotiate to supplier A by saying that the other suppliers can
provide a lower price for the raw materials.
Phase 2: This phase focusses on the fruit products with
the harvest time in more than 4 months or the products that
are not included in phase 1, which are apricots and pineapple.
In addition to that, most of the fruits in the southern
hemisphere countries are also having their peak harvest time
in the beginning of the year. For this phase, Company X
should include alternative suppliers for the RFI/RFP process
since there is enough time for Company X to contact the new
suppliers, check the companies if they meet the requirements
and quality needed to produce the products, visiting the
factory in the respective country, and auditing the financial
aspect of the companies. After doing this, the company can
start with the RFI/RFP process.
This strategy approach is the best to be implemented by
Company X because it is evaluated as suitable, feasible, and
acceptable. Firstly, the suitability is evaluated based on the
business unit data of the company. One of the most important
aspect is that the overall rational of the strategy fits with the
organization’s mission and objective, which is to build world
class sourcing capabilities and to deliver positive PPV in
2017. In addition to that, based on the product portfolio and
its spending, consolidation of suppliers is needed as the
current number of suppliers is not really efficient. It is shown
by some similar products that are currently produced by more
than one supplier, and some suppliers with relatively low
spending that only produce three to four products for the
company.
Secondly, in terms of the feasibility, it is evaluated by
the constraints to source the products from other countries to
Australia and New Zealand. As analyzed in the macro
analysis of Australia and New Zealand, it is feasible to source
products from both the current suppliers and the alternative
suppliers as Australia and New Zealand has a wide range of
FTA’s with many countries. Currently, there is also no
restriction to import products from a specific country,
however it has to strictly comply with the import food
regulation in Australia and New Zealand. Aside from that,
the duty rates should also be considered as they are different
for each country.
Lastly, the acceptability is evaluated based on the
current contract’s bound and time constraint to implement
the strategy. Based on the interview with Kent, the current
procurement process is still ad-hoc with no contract bound.
Thus, it is acceptable to directly change suppliers during this
time. In addition to that, the time needed to apply this strategy
is also acceptable, as it can still be concluded during the
harvest time of the fruits, which is the time when prices are
at the lowest point.
By implementing this strategy, it is expected to bring
both financial benefits and operational benefits for the
company. The financial benefit that is expected from this
strategy is in term of cost savings to source the canned fruit
products from external manufacturers. These benefits can
only be calculated once the RFI/RFP process is done, which
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around 10% of the total spending in the canned fruit product
category in Australia and New Zealand. In term of the
operational benefits, consolidating suppliers will leads to less
effort and time for the buyers to source this products. In
addition to that, Company X will also get the benefits from
economies of scale and also less knowledge spillover from
the implementation of this strategy.
There are some limitations and constraints for this
research report, which are as follows:
The 12-week time constraint and some confidential reports
have limited the possibility of exhaustive research
regarding the external analysis, especially the market
analysis and supply analysis.
The availability and confidentiality of some financial data
from the company, such as the profit margin of each
product and the actual number of cost savings that has been
achieved in 2017.
The cost limitation has limited the possibility to conduct
field research of contract manufacturers in Australia and
New Zealand.
For further research regarding strategic purchasing
plan from external manufacturers, the author recommends to
apply the theoretical framework and the purchasing
chessboard into various other case study to better refine the
model. Furthermore, the reliability of the application of these
framework should also be tested across several other
categories and in different area of procurement process.
Further research should also be done regarding other criteria
to select procurement strategy aside from the industry
analysis of the products and also the effectiveness of those
criteria towards the implementation of the strategy.
For the company itself, the author recommends that the
analysis to select and implement sourcing strategy should be
conducted continuously since the market and industry
condition will surely change overtime. Thus, the strategy that
is recommended in this report may not be the most applicable
in the next few years, and further research on how to best
source this product category from external manufacturers
should be reevaluated again.
higher price afterwards. To mitigate this risk, Company X
needs to review all the important information and
specifications before sending the RFP to the suppliers to
make sure that this information is accurate.
The third risk is regarding the cooperation with new
supplier. Since quality is a very crucial aspect in fo